The final months of the year are a great time to reflect on your accomplishments and plan for the upcoming year. Many employers use this time to evaluate the cost and effectiveness of their employee benefit programs, with the goal of ensuring that they offer the right mix of incentives to attract and retain key talent. Employees, in turn, may be asked to make important elections or decisions that relate to their benefits. Following are some tips to help employees get the most out of their workplace benefits.

As financial advisors we devote an enormous amount of time and energy crafting financial and estate planning strategies for our high net worth clients. While our wealthier clients provide us with interesting problems to solve, many of us take great enjoyment in helping clients with fewer resources and options to realize their retirement dreams. Unfortunately, most middle income clients are ill-prepared to retire and are not a target market for the majority of financial advisors.

Middle class clients face many of the same risks that our wealthier clients do: outliving their money, poor stock market performance and rising health or long-term care costs are near universal concerns. Others such as inflation and the death of a spouse may be particularly impactful for those with limited resources. So what are some simple tips that middle income clients might consider in planning for retirement? Continue reading →

Disability insurance is a contract between you and the insurance company that will replace your wages when you become sick or injured and cannot work for a long time.

According to the Social Security Administration, nearly 1 in 4 of today’s twenty year-olds will become disabled before age 67. Most people think that Social Security will provide the benefits that they need, but often that is not the case:

Social Security does not provide a person’s full wages as benefits.

Social Security has a very strict definition of what “disability” is and is not.

Social Security has a 5-month waiting period before you can receive any of the benefits. Even in the face of medical costs that are associated with disability income, it means forgoing income for 5 months.

Social Security should only be used as a supplement to your own long-term disability policy.

Many employers offer disability coverage as an additional fringe benefit, but as we mentioned in Part 1 of our posts on the topic, employer coverage only covers you while you’re working there and become disabled while you’re working there. Additionally, most group plans do not typically cover more than 60% of your salary. It is not portable. If you lose your job, your next employer may or may not have a long-term disability plan. Unlike health insurance where you can get coverage under COBRA for a period of time, once you leave your employer’s plan, you no longer have any coverage as a safety net.

To the extent you have employer coverage, if you are applying for personal, the insurance company will take that into account and decrease your benefit accordingly.

Q: How much disability should you obtain?

A: At least 80% of your before tax earnings.

When choosing a long-term disability insurance plan, these are some aspects of the fine print about which to ask:

Check the definition of ‘disability’ (there are 3 potential options)

Own occupation: this is the best definition of disability because it is the most broad. Under this definition, an insured person is considered entirely disabled if he is unable to do any or every duty of his occupation. For example, if you can get a job in a different industry, you can still collect benefits under this policy.

Any occupation: this is the strictest definition of disability. Under this definition, an insured person is considered disabled only when he is unable to do every duty for which he is trained.

Split definition: frequently used by insurance companies, this is some sort of combination of the two previous definitions.

Make sure that your contract is Non–Cancelable and Guaranteed Renewable. This guarantees that after you place a policy in-force that there will be no changes to your premium schedule, your monthly benefits, or your policy benefit. No one can guarantee that their incomes will never go down, under a Non-Cancelable policy even if your income goes down later in life, if you become totally disabled the insurance company will pay you the total disability benefit you originally placed in-force. Under a Non-Cancelable policy for example, if you changed jobs from being professional worker (a low-risk occupation) to a professional weight lifter the company could not change your benefits for the worse.

Make sure you get a cost of living rider, which is an inflation hedge for your benefits.

Ask for a FIO (future increase option), which allows you to increase your insurance benefits as income rises, regardless of health. Without this rider, there is no way to protect your future earnings. A disability insurance policy by itself only protects the amount of income that you make at the time when you take out the policy. It does not grow automatically unless you have this.

Check that the policy eliminates any requirement for you to pay any premium payments while you’re disabled.

Ask about a residual benefits clause, which is a partial payout due to partial disability. For example, receiving partial benefits if you’re only able to work part-time.

Evaluate and choosing the waiting period or elimination period as its sometimes known as. The elimination period is the period of time between the onset of a disability, and the time you are eligible for benefits. It is best thought of as a deductible period for your policy. The most common waiting period is 90 days, but it can be less or more time. Examples include 30, 60, 90, or 180 days to 1 year to 2 year waiting period.

Length of time or Benefit period. Think of the benefit period as the period of time you are eligible to collect benefits while on a disability insurance claim. The shortest period of time is coverage for 2 years up to life time benefits.

The underwriting for disability insurance is significantly different than the underwriting for life insurance. As you get older, there is a higher probability of getting disabled and many people begin to develop ailments. Therefore, over time it becomes more challenging and difficult to obtain reasonably priced long-term disability coverage.

It will depend on your overall health and what your doctors have put in your files.

If you had a machine in your basement that printed out $20 bills whenever you wanted, would you buy a warranty for the machine?

We recently had a meeting with a client that we’ve known for a long time. Despite an annual income of $500K+, we were concerned; his financial plan had a few major shortfalls, which put his family – his wife and two daughters – at risk.

Of note, his financial plan:

Did not have enough liquidity

Had no emergency account

Did not have enough savings for retirement

Had no personal disability insurance

The first few issues are ones we often encounter with new clients. These typical financial traps can be safely avoided with a good financial plan that re-allocates income and creates liquidity in savings.

The most worrisome part of this client’s financial plan is that he didn’t have personal long-term disability insurance.

Fifteen years ago, this client had bought life insurance, but declined purchasing long-term disability insurance. Why? His excuses are ones we hear far too often:

“My company offers disability insurance” (only for as long as you’re working there)

“It can’t happen to me” (unfortunately, it can’t until it does)

“I don’t want to pay for it” (if you need to use it, the investment in the premium will pay off very quickly)

Fast-forward fifteen years to our meeting last week. This client, like many people we know, has been diagnosed with a degenerative disease (something similar to multiple sclerosis, or muscular dystrophy, Lou Gehrig’s disease, etc.). Like many of those diseases, there’s no known cure. Moreover, the disease will get progressively worse over time. If/when he becomes disabled, the insurance that he bought through work will not cover him long-term. If he was to lose his job, not only is he completely vulnerable, but so is his family – there is no coverage in place.

Think back on the money-printing machine we asked about at the top of the page. Would you insure it? Most people answer yes that they would get a warranty for the money-printer; however, most people don’t take the same warranty out on their ability to work, which is their greatest asset and source of future money.